The emerging market complex has been caught in cross fire since yesterday after Donald Trump said Canada and Mexico would be excluded from the tariffs, provided that the three countries succeed in reaching a new NAFTA agreement, while other countries will still be subject to it. Therefore, it maintains the pressure on other commodity exporting countries, which casts a shadow on their growth outlook. Secondly, the continuous increase in US Treasury rates is adding pressure on higher-yielding currencies as it reduces the return of carry trades. As example, the 2-year interest rate differential between the US and Brazil currently stands at around 6%, compared to more than 16% in September 2015. The tightening that is underway in the US could only reduce the attractiveness of those currencies.

Yesterday, the Brazilian real fell 1% as USD/BRL rose to 3.2433, the Chilean pesos was off 0.43% with USD/CLP rising to 602.69. bThis morning, the South African rand fell 0.25% as USD/ZAR climbed to 11.8651. Given the rising uncertainty stemming from Trump trade war, we think that investors would cherry pick their EM investments and stick to currencies would be the least impacted by the new US tariffs, meaning countries that are doing the least business with the US. Indeed, what guarantee that President Trump will not use the same trick to target specific trade partners with which the US has a trade deficit?